Budget for a government willing to take time

This is a budget written by a government that thinks it has all the time in the world. Its short-term gradualism jars spectacularly with all the hysteria it hurled from opposition about budget crisis and debt.

But assessing the weakened state of its opponents, Tony Abbott and Joe Hockey have used their first budget not to make immediate rapid cuts in spending but to maximise the time they have to implement major structural reforms of the budget without hurting a still-weak economy.

In the medium term, some of the cuts are massive, even shocking, particularly to health and education. But in the short term, the lack of fiscal consolidation, underpinned by increased taxation, makes the Abbott government look like a bunch of girls.

A Prime Minister who promised no new or increased taxes has overseen a budget that will see revenue as a proportion of gross domestic product rise 2 percentage points to 25.5 per cent in 2017-18, its highest level since 2005 and well above the government’s ambition of tax at a long-term average of about 24 per cent of GDP.

At the same time, spending is only forecast to fall just over 1 percentage point of GDP over four years, compared with a cut of around 1 percentage point in one year in the first Costello budget and a cut of a similar magnitude by John Howard in 1978.

A Prime Minister who was elected promising to restore trust in politics is now asking voters to trust him and his team to deliver a major budget consolidation some time in its second term: a return to surplus in 2018-19 and tax relief in 2019-20. And that is after delivering a budget which will require a lot of fast talking to persuade people that it does not involve plenty of broken promises.

Setting the scene for tax reform

Yet this budget sets the scene for a major tax reform election in 2016, and for a rewriting of federalism by forcing the states to change their own funding of the areas of health and education. That is, Abbott is giving the states little choice but to agree to an increase in the GST.

It is structured in a way that will make it as difficult as possible for the Senate to block. Can Labor oppose a deficit levy that only applies to high-income earners when low-income earners are losing family tax benefits? Can the Senate oppose a Medicare co-payment that is funding the largest medical research fund in the world?

The expenditure review committee’s focus was on getting over the spending time bomb Labor left for it in 2017 and beyond.

To address this, it has put in place a raft of prospective changes to welfare, health, foreign aid and education which will reap some savings in the next four years but rapidly build to significant savings beyond 2017. A $29 billion deficit in 2017-18 has been transformed in to a $2.8 billion deficit.

This is a big budget: the list of individual savings measures goes for some 26 pages, and contained in those pages is a world of pain for almost every sector of the community but particularly the young. They will have to pay more for education, and see the subsidised interest rate on their higher education loans cut. The young unemployed will feel the brunt of the budget up front.

The budget does deliver on Hockey’s promise to end the age of entitlement, although it seems some animals will remain more entitled than others under the Abbott government.

For example, while there are big savings to be had from gradually choking the number of people who can get the age pension, slowing the rate at which the pension increases, and cutting access to the Seniors Health Card, these will all be prospective changes.

A shock for the young

There is no such gradualism for young people considering higher education, or finding themselves out of work, or people going to the doctor.

Many of the spending cuts – such as huge ones to hospitals and education – will hurt everyone. But they will come through systemic cuts, as much as cuts in personal entitlement.

Voters who have been postponing their judgment on the Abbott government until the budget, may find themselves a little perplexed as they re-engage.

The budget does not contain the extreme ideological stupidity of some early Howard government measures, nor Labor’s panicky and ultimately self-defeating attempts to prove its fiscal machismo.

But it is possibly also not a budget that voters might expect from Abbott – a leader many voted for with little passion because they couldn’t stomach the alternative.

The new government’s love affair with a strategy of linking pain and reward – the Medicare co-payment funding a health research fund for example – provokes a different conversation to one that may have been prompted by the Commission of Audit’s call a fortnight ago for that same co-payment to be the forerunner of an end to universal healthcare.

The budget forecasts portray an economy that is changing. It is still weak. The centre of activity is changing from resources. But it is now on a trajectory strong enough to finally produce a recovery in government revenue.

But there is also much in the budget to suggest the political conversation is about to be transformed. Hospitals and schools are being thrown back to the states to fix. Middle-class welfare is being cut back. Higher education is being unleashed.

The government is braced for a world of pain from the headlines in coming weeks but it is equally confident it has put in place the building blocks for a long tenure in government. Tony Abbott and Joe Hockey may equally force their opponents to re-examine their messages to voters.

The Australian Financial Review

BY Laura Tingle

Laura Tingle, The Australian Financial Review's
political editor, has worked in the parliamentary press gallery in
Canberra for more than 25 years. Laura has won two Walkley awards and
the Paul Lyneham Award for Excellence in Press Gallery Journalism and
has also been highly commended by the Walkley judges for
investigative reporting.

BY Laura Tingle

Laura Tingle, The Australian Financial Review's
political editor, has worked in the parliamentary press gallery in
Canberra for more than 25 years. Laura has won two Walkley awards and
the Paul Lyneham Award for Excellence in Press Gallery Journalism and
has also been highly commended by the Walkley judges for
investigative reporting.